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Financial Management

© All Rights Reserved

15 views

Financial Management

© All Rights Reserved

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MS344 Financial Management

Pre-Requisite: MS101 Business Mathematics

Instructor:

Dr. Mian Muhammad Atif

Office:

G-04, Brabers Building, GIK Institute, Ext. 2291

Email: mmatif@giki.edu.pk

Office Hours:

To be announced in the class

Course Introduction

The objective of this course is to introduce the students to the basic principles used in financial

management and their applications in long-term investment and financing. This course introduces

students to fundamental principles of finance i.e. time value of money and relations between risk and

return, MM theories of irrelevance and efficient markets. Through exposure to these fundamental

concepts it is expected that the students will learn how to apply their knowledge the valuation of stocks

and bonds, financial planning, capital budgeting, long-term financing, capital structure, dividend policy,

working capital management, and risk management.

Course Contents

Meaning and Scope of Financial Management and role of finance manager.

Understanding financial statements and cash flows

Time Value of Money

Capital Budgeting,

Risk and Return

The Cost of Capital

Capital Structure

Working Capital Management

Mapping of CLOs and PLOs

Course Learning Outcomes

Sr. No

CLO_

1

CLO_

2

CLO_

3

CLO_

4

CLO_

5

corporate financial decisions

Analysis of financial statements.

Tools and techniques of time value of money for

investing decisions and Estimate the required return on

projects of differing risk and how to use the required

return in evaluating investment decisions.

Working capital and its components, applications of

different techniques that managers can use to manage

various aspects of working capital cash and liquidity,

credit and receivables, inventories, etc.

Different theories of capital structure, their predictions

about optimal capital structure and the limitations of

using debt in the firms capital structure

Assessment Tool

Quizzes

Assignments

Mid Term

PLOs

Blooms

Taxonomy

PLO_2,PLO_6,

PLO_8, PLO_11

PLO_2,PLO_6,

PLO_8,

PLO_2, PLO_6,

PLO_7, PLO_8,

PLO_11

PLO_2, PLO_6,

PLO_7, PLO_8,

PLO_11

PLO_2, PLO_6,

PLO_7, PLO_8,

PLO_11

CLO_1

CLO_2

CLO_3

100

0

0

0

100

0

0

0

50

CLO_4

0

0

50

CLO_5

0

100

0

GIK Institute of Engineering, Sciences and Technology

Final Exam

50

50

GIK Institute of Engineering, Sciences and Technology

Announced/Surprise Quizzes

Project/Assignment

Class Participation

Mid Term Exam

Final Exam

Grading Policy

05%

15%

05%

25%

50%

Text and Reference Books

Text Book:

Ross, S., Westerfield, R., Jordan, B. (Latest Edition). Essentials of Corporate Finance. McGraw-Hill: Irwin:

Chicago

Reference Books:

Ross, S. A., Westerfield, R., & Jordan, B. D. (2008). Fundamentals of corporate finance. Tata McGraw-Hill

Education.

Brealey, Richard A., Myers, Stewart C., Marcys, Alan J. (1999). Fundamentals of corporate finance.

Irwin:Mcgraw-Hill.

Ehrhardt, M., & Brigham, E. (2013 or latest available edition). Corporate finance: A focused approach.

Cengage Learning.

Administrative Instructions

According to institute policy, 80% attendance is MANDATORY to appear in the final examination.

There will be no retake of quizzes.

It is expected that you will always come to class well prepared having read the assigned material for

the class.

All assignments must be submitted both in PRINTED as well as in SOFT COPY. Extension in the

deadline will only be granted under extreme circumstances (on case-to-case basis) and must be

applied for at least 7 working days prior to the deadline. Please name your files (soft copy) as

Course_Class_Assignment_1_Roll Number e.g. for financial management class it will be

FM_SemV_Assignment_1_02.

For any queries, please follow the office hours in order to avoid any inconvenience.

Week

1

Lecture Breakdown

Topics Covered

Meaning and Scope of Financial Management.

Finance and financial management; Scope of Financial management;

Business organizations; Organization of the finance function; Finance

management vs. other managerial functions; The roles of the finance

manager; Goals of the firm; Agency problems and their mitigation

Time Value of Money

Calculate the future value (FV) or present value (PV) of a single sum of

money; Calculate the interest rate or time period for single-sum

problems; Calculate the FV or PV of an annuity and an annuity due;

Calculate the payments, interest rate, or time period for annuity and

GIK Institute of Engineering, Sciences and Technology

3&4

5&6

7&9

10 &

11

perpetuity problem; Calculate the FV or PV of a series of uneven cash

flows (i.e., compound or discount the Cash flows); Adapt all FV and PV

calculations to other-than-annual compounding periods; Compute the

solution for various time value of money problems.

The Basics of Capital Budgeting

define capital budgeting; describe and calculate four methods used to

evaluate capital projects: payback period, discounted payback period,

net present value (NPV), and internal rate of return (IRR); explain the NPV

profile; explain the relative advantages and disadvantages of the NPV

and IRR methods, particularly with respect to independent versus

mutually exclusive projects; Describe and calculate the modified IRR

(MIRR); Explain the multiple IRR problem and the condition that can

cause the problem; Explain why NPV, IRR, and MIRR methods can

produce conflicting rankings for capital projects.

Cash Flow Estimation and Other Topics in Capital Budgeting

Distinguish between cash flows and accounting profits; Define the

following terms and discuss their relevance to capital budgeting:

incremental cash flow, sunk cost, opportunity cost, externality, and

cannibalization; Define an expansion project and a replacement project;

Determine by NPV analysis whether a replacement project should be

undertaken; Define initial investment outlay, operating cash flow over a

projects life, and terminal-year cash flow, and compute each measure

for an expansion project and a replacement project; Compare two

projects with unequal lives, using both the replacement chain and

equivalent annual annuity approaches; Discuss the effects of inflation on

capital budgeting analysis.

Risk and Return

Stand Alone Risk; The Trade Off between Risk and Return; Define and

explain leverage, business risk, sales risk, operating risk, and financial

risk and classify a risk, given a description; Calculate and interpret the

degree of operating leverage, the degree of financial leverage, and the

degree of total leverage; Describe the effect of financial leverage on a

companys net income and return on equity; Calculate the breakeven

quantity of sales and determine the companys net income at various

sales levels; Calculate and interpret the operating breakeven quantity of

sales;

Analysis of Financial Statement

Interpret common-size balance sheets and common-size income

statements and demonstrate their use by applying either vertical

analysis or horizontal analysis; Calculate and interpret measures of a

companys operating efficiency, internal liquidity (liquidity ratios),

solvency, and profitability, and demonstrate the use of these measures in

company analysis; Calculate and interpret basic earnings per share and

diluted earnings per share; Calculate and interpret book value of equity

GIK Institute of Engineering, Sciences and Technology

12 &

13

14 &

15

16

ratio, and plowback ratio; Describe the elements of operating cash flows;

Describe the elements of investing cash flows; Describe the elements of

financing cash flows; Classify a particular item as an operating cash flow,

an investing cash flow, or a Financing cash flow; Compute, explain, and

interpret a statement of cash flows, using the direct method and the

indirect method; Compute free cash flow.

Capital Structure

Explain the ModiglianiMiller propositions concerning capital structure,

including the impact of leverage, taxes, financial distress, agency costs,

and asymmetric information on a companys cost of equity, cost of

capital, and optimal capital structure; Explain the target capital structure

and why actual capital structure may fluctuate around the target;

Describe the role of debt ratings in capital structure policy; Explain

factors that we should consider in evaluating the impact of capital

structure policy on valuation; Describe international differences in

financial leverage and their implications for investment analysis;

Describe the role of debt ratings in capital structure policy;

Cost of Capital

Calculate and interpret the weighted average cost of capital (WACC) of a

company; Describe how taxes affect the cost of capital from different

capital sources; Explain alternative methods of calculating the weights

used in the WACC, including the use of the companys target capital

structure; Explain how the marginal cost of capital and the investment

opportunity schedule are used to determine the optimal capital budget;

Explain the marginal cost of capitals role in determining the net present

value of a project; Calculate and interpret the cost of fixed rate debt

capital using the yield-to-maturity approach and the debt-rating

approach; Calculate and interpret the cost of noncallable, nonconvertible

preferred stock; Calculate and interpret the cost of equity capital using

the capital asset pricing model approach, the dividend discount

approach, and the bond yield plus risk premium approach; Calculate and

interpret the beta and cost of capital for a project; Explain the country

equity risk premium in the estimation of the cost of equity for a company

located in a developing market; Describe the marginal cost of capital

schedule, explain why it may be upward sloping with respect to

additional capital, and calculate and interpret its break points; Explain

and demonstrate the correct treatment of flotation costs;

Working Capital Management

Describe primary sources of liquidity and factors that influence a

companys liquidity position; Identify and evaluate the necessary tools to

use in managing a companys net daily cash position; Compare a

companys liquidity measures with those of peer companies; Evaluate

GIK Institute of Engineering, Sciences and Technology

working capital effectiveness of a company based on its operating and

cash conversion cycles, and compare the companys effectiveness with

that of peer companies; Evaluate working capital effectiveness of a

company based on its operating and cash conversion cycles, and

compare the companys effectiveness with that of peer companies;

Evaluate working capital effectiveness of a company based on its

operating and cash conversion cycles, and compare the companys

effectiveness with that of peer companies; Explain the effect of different

types of cash flows on a companys net daily cash position; Calculate and

interpret comparable yields on various securities, compare portfolio

returns against a standard benchmark, and evaluate a companys shortterm investment policy guidelines; Evaluate a companys management of

accounts receivable, inventory, and accounts payable over time and

compared to peer companies; Evaluate the choices of short-term funding

available to a company and recommend a financing method;

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